Today, many Americans rely on 401(k)s as their retirement savings plan. Unlike a traditional pension plan, these plans leave much of the decision-making to employees to ensure they are setting themselves up successfully for retirement. Employees contribute to the plan, their employers match a portion of the contribution, and the accounts continue to grow until employees are no longer working.
I’d like to share my experience, professionally and personally, with a 401(k) plan and some of the planning options. As a former employee of United Technologies (UTC, previously Goodrich), I invested in the options available in the company’s 401(k). Since leaving the company in 2015 to become a CERTIFIED FINANCIAL PLANNERTM, I have worked with a number of former colleagues and executives of UTC, which is now Raytheon Technologies.
Companies such as Raytheon Technologies, and its predecessor firms Collins Aerospace and UTC, offer other features in their 401(k) plan, including matching funds with company stock through the Employee Stock Ownership Plan (ESOP). Employees have the flexibility to invest in the menu of options the company provides, which can include company stock. Here are planning techniques you may want to consider if you have RTX, CARR, OTIS, or any other stock in your 401(k).
If you continue to be employed by Raytheon Technologies:
Review the allocation of your 401(k) periodically to ensure you have a good mix of stocks and bonds based on your risk tolerance and length of time to retirement. The plan provided by Raytheon Technologies offers low-cost diversified options from which you can choose the right mix for you. You should ensure you are not positioning too much of your allocation to company stock, which may expose you to unnecessary risk. Since this company is your employer, more may be severely impacted if something negative happens to it, and all of your wealth and earnings are tied to it.
Avoid Concentration Risk
Determine what percentage of your 401(k) you would like to have in company stock, for example 15 percent or 20 percent, and periodically adjust your allocation if you exceed it. Concentration risk occurs when you own too much of one company’s stock, which can quickly overtake a larger than desired chunk of your retirement assets. Note that a company like Raytheon Technologies may also offer company stock as an incentive outside of your 401(k), which may add even more concentration risk. Factoring in all exposure to company stock is important.
If you recently took the Voluntary Separation Package (VSP) or are no longer employed by Raytheon Technologies
Consider Net Unrealized Appreciation (NUA)
When you are no longer working at Raytheon Technologies, or any other company, and your 401(k) has not yet been rolled over to an IRA, you have options that may include Net Unrealized Appreciation (NUA). You should absolutely consider this strategy if you have low-cost basis company stock in your 401(k). It’s a way of transferring company stock “in-kind” to a non-retirement brokerage account in the same year you roll your 401(k) to an IRA account. Determining whether it’s right for you and if it fits into your overall financial picture depends on several factors. Here are some of the benefits:
- Tax Savings and Flexibility — Once completed, your company stock can continue to grow at more favorable long-term capital gain tax rates within a non-retirement brokerage account. Had you instead rolled the stock to an IRA, it would be taxed at higher ordinary income rates at the time you begin withdrawing from your IRA. You also have more control over accessing your assets in the non-retirement account.
- Lower Future Required Minimum Distributions (RMD) — Since the portion of company stock is no longer in the 401(k)/IRA, it will not be included in the account value that is used to calculate RMDs once you reach age 72, based on current tax rules.
- Charity* — If the stock continues to appreciate, and you have charitable intent, you can contribute shares to charity. Most charitable organizations and churches that have 501(c)(3) status accept company stock as a donation. It’s a win-win, as the charity sells the stock immediately and doesn’t pay taxes on it and you eliminate the taxable gain had you sold the stock instead.
*Note there are also ways to contribute to charity with your IRA through a Qualified Charitable Distribution (QCD).
We recommend consulting with a professional to fully understand the pros and cons, as well as the rules that pertain to your plan, so you can make an informed decision. There are strict rules on executing NUA correctly, so consulting a professional who can take you through the details will help avoid costly mistakes.
If you find you have a concentration of RTX, CARR, OTIS or any other stock in your 401(k), give us a call at CCMI. I have assisted clients with these strategies and am familiar with the rules of the Raytheon Technologies plan. A customized analysis showing the estimated tax savings can be completed for you anytime. Furthermore, I am happy to advise on how NUA fits into your overall financial picture and provide any additional financial planning advice and portfolio management services.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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